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Cisco Systems (NASDAQ:CSCO)
Q1 2018 Earnings Conference Call
Nov. 15, 2017 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks: 

Operator

Welcome to Cisco's Q1 fiscal year 2018 financial results conference call. At the request of Cisco, today's call is being recorded. If you have any objections, you may disconnect. Now, I would like to introduce Marilyn Mora, Head of Investor Relations.

Ma'am, you may begin.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Mark. Welcome everyone to Cisco's Q1 fiscal 2018 quarterly earnings conference call. This is Marilyn Mora, Head of Investor Relations. I'm joined by Chuck Robbins, our CEO and Kelly Kramer our CFO.

By now you should have seen our earnings press release. A corresponding webcast with slides including supplemental information will be made available on our website in the 'Investor Relations; section following the call. Income statements for GAAP to non-GAAP reconciliation information, balance sheets, cash flow statement and other financial information can also be found in the 'Financial Information' section of our Investor Relations website. As a reminder, effective in Q1 we'll begin reporting all revenue in the following categories: Infrastructure platforms, applications, security, other products, and services.

As discussed in our Q4 earnings call and in our October 23rd press release, this change better aligns our product categories with our evolving business model. Our segments will continue to be based on geographies which consist of the Americas, EMEA, and APJC. So, this change only impacts how we report revenue by product category. We've included quarterly reclassified revenue amounts for the last three fiscal years on our website.

Click on the 'Financial Reporting' section of the website to access these documents. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results and we'll discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise. All comparison throughout this call will be made on a year-over-year basis unless stated otherwise. The matters we will be discussing today include forward-looking statements including the guidance we will be providing for the Q2 of fiscal 2018.

They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Form 10K which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. With respect to guidance, please also see the slides and press release that accompanies this call for further details. As a reminder, Cisco will not comment on its financial guidance during the quarter unless it is done to an explicit public disclosure.

With that, I'll turn it over to Chuck.

Chuck Robbins -- Chief Executive Officer

Thank you, Marilyn. Good afternoon, everyone. Our results this quarter demonstrate the continued progress we're making on our strategic priorities. In Q1 we delivered a solid quarter with revenue of 12.1 billion and non-GAAP EPS of $0.61.

We are seeing great traction with our new intent-based networking solutions, delivering accelerated innovation across our portfolio and offering a broader range of new consumption options to our customers resulting in strong increases in our software and subscription revenue. The progress we've made resulted in all three of our geographic regions returning to orders growth during Q1. Cisco has always been about connecting people, information, and machines at scale. Today, the network is becoming more pervasive and critical to business success as billions of new connections are added.

We expect these new connections will become increasingly automated, intelligent and secure, delivering unprecedented insights and intelligence to our customers.

Cisco's vision is to deliver highly secure intuitive technology across our portfolio that is designed to constantly learn, adapt and protect to drive business outcomes with greater speed and agility. This extends to the network, next-generation data center architectures, advanced IoT applications, end-to-end analytics and our collaboration technologies. Our vision is resonating with customers and partners around the world as we help them build more secure intelligent platforms for their digital businesses. Today, most of our customers are operating in complex multi-cloud environments and Cisco is well positioned to provide them with networking capabilities, enterprise-class security and support together with cloud scale, agility, and economics.

Our new partnership with Google is a good example of this. Over the last few months, our engineering teams have been working closely together to jointly develop a new hybrid cloud solution that is designed to enable applications and services to be deployed, managed and secured across on-premise environments as well as a Google cloud platform, bringing the best of the cloud to the enterprise. This partnership is an example of the work we were doing with all of the large web scale providers. We're also investing to develop and acquire new technologies to extend our multi-cloud portfolio.

This includes ACI Anywhere which we announced this quarter and acquisition such as CliQr, OpenDNS, CloudLock, AppDynamics and Viptela.

Now, I'd like to cover some key business highlights in our new product reporting categories. First, let's start with infrastructure platforms. Our launch of the Network Intuitive in June is an example of the investment and innovation we're driving in our core business. These new intent-based networking capabilities are providing customers unparalleled insights and intelligence together with highly differentiated security and programmability.

Our new subscription-based Catalysts 9000 switching platform has been adopted by more than 11,000 customers in just over three months. We expect continued momentum throughout fiscal 2018 and we're pleased that the vast majority of Catalyst 9000 customers are buying our most advanced software subscription offer. Additionally, we saw good performance in our next generation data center switching platforms as customers continue to shift to 10 gig, 40 gig, and 100 gig architectures and embrace multi-cloud adoption.

We continued to advance our intent-based networking for data center and private cloud environments with the latest software release of ACI. Over 4000 ACI customers are benefiting from increased business agility with network automation, simplified management and improve security. Going forward, we see a tremendous opportunity to benefit from a shift in customer demand from stand-alone products to integrated platforms with our intent-based infrastructure portfolio providing unmatched benefits.

Now, turning to applications. Applications are absolutely central to every digital business strategy. To maximize their effectiveness, companies require a highly secure network that closely monitors applications and workload performance across a complex multi-cloud environment. Our acquisition of AppDynamics is core to our capability of providing end-to-end analytics from the network to the data center to the application.

Within our applications business, we're enabling new capabilities based on advanced AI and machine learning across our portfolio. An example of this is our acquisition of Perspica, providing deep machine learning driven analytics to further extend AppDynamics leading capabilities and application intelligence.

Additionally, we announced our latest innovation on the Cisco Spark platform Spark Assistant which is the world's first enterprise-ready AI-powered voice assistant to further enhance our customer's meeting experience. Our intended acquisition of BroadSoft will enhance our subscription and cloud-based business. BroadSoft has 19 million subscribers in the growing cloud voice and contact center space. It will enable Cisco to offer an even broader portfolio of collaboration solutions to our customers on-premise and in the cloud.

We expect this acquisition to accelerate the pace of innovation in our collaboration business and we see many opportunities to extend the reach of the BroadSoft portfolio.

Moving to security. With an expanding threat landscape, cyber security is the number one priority for businesses worldwide and is at the heart of every company's digital strategy. In a multi-cloud world, as our customer's environment's become increasingly distributed, security requirements only increase. At Cisco, security continues to be a strategic imperative and fundamental to everything we do.

As customers adopt an advance intent-based networking, our end-to-end security is the foundation to keep our customers protected from advanced threats. This architecture combined with the best-of-breed portfolio across the network, endpoint, and cloud enables our customers to reduce the time to detection as well as complexity and cost. As a result, we believe Cisco is delivering the most effective and comprehensive security solutions in the market. This differentiated strategy drove the 8% revenue growth in our security portfolio and we also saw continued momentum in our security deferred revenue with 42% growth.

To summarize, we delivered a solid quarter as we continue to execute well against our strategic priorities. I firmly believe that Cisco is well positioned to capture long-term growth opportunities ahead. We remain focused on providing our customers with the most innovative portfolio of offerings in the industry powered by intent-based capabilities and delivered to a range of consumption models, providing more flexibility than ever before.

Now, I'll turn it over to Kelly to walk through more detail on our financials.

Kelly Kramer -- Chief Financial Officer

Thanks, Chuck. I'll start with the summary of our financial results for the quarter followed by the Q2 outlook. Total revenue was 12.1 billion, down 2%. We continued to focus on driving margins and profitability with a non-GAAP operating margin of 30.4%, non-GAAP EPS was $0.61 and operating cash flow was strong, growing 13% to 3.1 billion.

The role of enterprise IT is dramatically changing with the move to an application-centric focus and adoption of hybrid cloud architectures with customers increasingly seeing the value of integrated platform over stand-alone products. Cisco's intent-driven architecture with a focus on simplicity, automation, and security allows enterprises to manage and govern the interactions of users, devices, and applications across the environment. Starting in Q1 to better reflect this shift, we changed our product reporting categories which are now infrastructure platform, applications, security, other products and services.

So, let me give you a little bit more detail on our Q1 revenue. Total product revenue was down 3%. Infrastructure platforms declined 4% with the vast majority of the decline driving by routing products. This was driven by continued weakness in service provider and a slowdown in enterprise routing.

Our switching revenue was down modestly but we saw a good momentum on orders in Campus switching with the Network Intuitive lunch. Additionally, we did see continued strong wireless revenue performance and a solid uptick of our HyperFlex data center offering.

Let's move on to applications. To remind you, applications are made up of our collaboration portfolio of Unified Communications, Conferencing and Telepresence as well as our IoT and application software businesses such as AppDynamics and Jasper. Applications increased 6% in total with collaboration up modestly and AppDynamics driving most of the increase. We did see strong growth in deferred revenue of 18%.

There was also a strong increase in the unbilled deferred which is not on the balance sheet, bringing the combined total of deferred revenue plus unbilled deferred up 32%. Security was up 8% with strong performance in unified threat, advanced threat and web security and deferred revenue grew 42% as we continue to drive more subscription-based software offers.

Service revenue was up 1% driven by growth in software and solution services. During the quarter, we introduced new portfolio subscription offers called Business Critical and High-Value Services powered by AI to predict future IT failures before they happen. We drove good growth in deferred revenue which was up 10% in total with product up 16% and services up 5%. Deferred product revenue from our recurring software and subscription offers was up 37% to 5.2 billion.

We continued to transform our business, delivering more software offerings and driving more subscriptions and recurring revenues. In Q1, we generated 32% of our total revenue from recurring offers, an increase of over 3 points from a year ago. Revenue from software subscriptions was 52% of our software revenue.

In terms of orders in Q1, total product orders grew 1%. Looking at our geographies, Americas grew 1%, EMEA was up 2% and APJC grew 1%. Total emerging markets declined 6% with the BRICS plus Mexico also down 9%. In our customer segments, enterprise declined 5%, commercial grew 12%, public sector was up 3% and service provider declined 6%.

From a non-GAAP profitability perspective, the total Q1 gross margin was 63.7%, down 1.5 points. Product gross margin was 63%, down 1.8 points and service gross margin was 65.6%, down 0.6 points. We continue to be negatively impacted by higher memory pricing like we've discussed over the past several calls, which we expect to continue in the near term. Our operating margin was 30.4%, down 1.2 points.

When we look at the impact of acquisitions on our results every year, there's been a 60-basis-point positive impact on revenue, no impact on gross margin, a 3-point increase a non-GAAP operating expenses, all resulting in a negative 70-basis-point impact on our non-GAAP operating margin rate and a negative penny year-over-year impact on our non-GAAP EPS.

In terms of the bottom line, our Q1 non-GAAP EPS was $0.61 while gap EPS was $0.48. We ended Q1 with total cash, cash equivalents and investments of 71.6 billion with 2.5 billion available in the US. Q1 operating cash flow had very strong growth of 13% to 3.1 billion and free cash flow was also very strong with growth of 19% to 2.9 billion. From capital allocation perspective, we returned 3.1 billion to shareholders during the quarter.

That included 1.6 billion of share repurchases and 1.4 billion for our quarterly dividend.

To summarize, in Q1 we continued to make progress on our strategic growth priorities while maintaining rigorous discipline on profitability and cash generation. We continued to prioritize our key investments to drive long-term profitable growth.

Let me reiterate our guidance for Q2 of fiscal year 2018. This guidance includes the type of forward-looking information that Marilyn referred to earlier and also, as Chuck mentioned, we announced a definitive agreement to acquire BroadSoft. The acquisition is expected to close after completion of the customary regulatory reviews and therefore it is not included in the guidance.

We expect revenue growth in the range of 1% to 3% year over year. We anticipate the non-GAAP gross margin rate to be in the range of 62.5% to 63.5% and the non-GAAP operating margin rate is expected to be in the range of 29.5% to 30.5% and the non-GAAP tax provision rate is expected to be 22%. Non-GAAP earnings per share is expected to range from $0.58 to $0.60.

I'll now turn it back to Marilyn so we can move into Q&A.

Questions and Answers:

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Kelly. Mark, let's go ahead and open the lines for questions. And of course, while Mark is doing that, I'd like to go ahead and remind the audience that we ask you to ask one question so that we have plenty of time for others in the audience to address questions to Chuck and Kelly?

Operator

Thank you. Our first question comes from the line of Pierre Ferragu with Sanford C. Bernstein & Co. Your line is open.

Pierre Ferragu -- Sanford Bernstein -- Analyst

Thank you for taking my question. Kelly, I can't help asking you an update on gross margin movement. So, can you give us a bit of a sense of how big is memory prices in the [inaudible] point gross margin decline that you've seen year on year and then sequentially your guide for gross margin for Q2 is slightly below what you've been guiding for Q1? Is there still [inaudible] headwind coming from component pricing [inaudible] Q1 to Q2? Thank you.

Kelly Kramer -- Chief Financial Officer

Thanks, Pierre. Great question. So, the vast majority of the impact on our gross margin is driven by memory. It is basically 1.3 points of my product gross margin decline year over year.

Everything else in our gross margin is basically within the normal ranges. So, we expect that to continue. When you look at the guidance, we did bring it down half a point to account for that because we are still seeing increases as we look forward moving forward but otherwise, kind of see everything else in the normal range of things.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Pierre. Let's go ahead and take the next question.

Operator

Our next question comes from the line of Mark Moskowitz with the Barclays Capital.

Mark Moskowitz -- Barclays -- Analyst

Thank you. Good afternoon. Chuck, you talked about 100 hundred customers have already adopted the Intuitive Network. Can you give me a sense in terms of how does that underpin longer-term steady-state growth? You guys got it to about 1% to 3% growth for the current quarter but as more and more of those customers adopt and move beyond the labs, move beyond the proof of concept, can we actually see your growth tick higher than 1% to 3% on a steady state.

Chuck Robbins -- Chief Executive Officer

Yeah, Mark, thanks for the question. So, clearly, we're pleased with where we're going right now with this product portfolio. We're pleased with the early feedback. I'll tell you that our sales teams, our partners, and our customers are very excited about the architecture that we've announced.

It's still one quarter. So, we have to get a little more time under our belt but what I will tell you is that when we look back at a transition like the 3850 years and years ago, it's very much in line and I think that as more customers have the opportunity to test the automation and programmability and all the software features that they're testing right now, we would hope that the platform continues to accelerate. So, one quarter down but we feel good about where we are.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Chuck. Let's go ahead and take the next question, Mark.

Operator

Our next question comes from Steven Milunovich with UBS Securities.

Steven Milunovich -- UBS -- Analyst

Thank you. Continuing along those lines, Chuck, you talked a little bit about the software attach rates. Could you elaborate on that and particularly the advantage premium which I think has the encryption capability and so forth? Exactly what sort of mix are you seeing and do you think the customers are going to be willing to pay up for the premium?

Chuck Robbins -- Chief Executive Officer

Well, thanks, Steve. So, what I said in the script is that a vast majority of our customers that are buying these platforms are opting for the advance and I would say that it's a vast majority. We knew when we introduced a subscription on a switch that we needed to ensure that there was unique innovation that was available to our customers in order for them to see value in that. We couldn't just simply shift capabilities that they had gotten before in a perpetual model.

We needed to drive new innovations. So, the anchors that are in that advanced subscription are the overall automation capability which really gets at the Op-Ex of running these networks. And the second part is the encrypted traffic analytics where we can determine when there's malware inside encrypted traffic without decrypting it. And we think that those two are phenomenal incremental capabilities that our customers didn't have before and I think that's why we're seeing such a high attach rate.

So, we're very pleased where we all not as well.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Steve. Next question.

Operator

Our next question is from Vijay Bhagavath with Deutsche Bank Securities.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Hey, good afternoon, Chuck, Kelly.

Kelly Kramer -- Chief Financial Officer

Hey, Vijay.

Chuck Robbins -- Chief Executive Officer

Hey, Vijay.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Hi, Chuck. My question for you, Chuck and Kelly please join in, is has anything changed in your sales motion in terms of data center switching? And the reason I ask is you're starting to see this positive New Slow Ali Baba cloud recently and perhaps here in Microsoft as well. What has changed in your view, Chuck, in terms of the sales motion? Is it the clouds paying attention to things like software, automation, tools, security, anything else or is it just sales focus on the cloud? Help us understand. Thanks.

Chuck Robbins -- Chief Executive Officer

Vijay, thanks for the question. We've been talking about this for several calls now about how we reengaged with the large web scale providers right after I became the CEO and these are long processes as they made major architectural decisions and they have franchises that you're trying To reenter but if you look at whether it's the announcements we made with Microsoft a couple of quarters ago, the announcement we made with Google, you alluded to Ali Baba which there's a summary of that win on our website if you want to go see that. It's our first insertion there and actually, it was before the large sales day that they experienced, I think, last week. So, we continue to make progress and we're continuing to execute on what I've told you that we were executing on over the last year and a half which is trying to go deeper.

I think the other thing that has become eminently clear is that these large web scale providers realized that it is going to be a multi-cloud world and they definitely have come to the conclusion that the edge is going to be mission-critical for our customers going forward. And as I think about that, we're the very natural partner for them to partner with as the network is the only common denominator across all these cloud environments all the way out to the edge of our enterprise customer's network. So, we're just continuing to execute against what we set out two years ago and we hope to continue to see success.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Chuck. Next question, please.

Operator

Our next question is from Paul Silverstein with a Cowen & Co.

Paul Silverstein -- Cowen & Co. -- Analyst

Hey, Chuck and Kelly, I recognize you guys are no longer breaking it out but I'm hoping that you'll throw us a bone and put numbers on the data center switching revenue growth given how important it is and how strong a growth market that's been. And as part of that, Chuck, related to the previous question, can you give us any quantification of your progress with Web 2.0 hyperscale customer segment given the importance of that segment?

Kelly Kramer -- Chief Financial Officer

So, Paul, I mean, obviously we're trying to go to new groupings but just to give you some color, we continue to see the double-digit growth that we've been talking about as our ACI portfolio continues on a strong double-digit and overall data center was certainly up from the revenue perspective.

Chuck Robbins -- Chief Executive Officer

Paul, from a perspective of the web scale, I mean, it's really just what I described. We're in discussions with all of them. We have made announcements with several of them and we continue to execute against our strategy and these are large franchises. There are two facets and if you remember two or three calls back I said that we're now expanding our discussions into 360-degree relationship discussions.

The Google announcement was reflective of that comment because not only are we working on their infrastructure but we're also working significantly on this multi-cloud enablement, hybrid cloud enablement and helping bridge our customers, their premise-based solutions, the edge-based solutions, their cloud applications, their SaaS applications. And so, we're continuing to execute on that right now.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Paul, for the question. Next question, Mark?

Operator

Our next question is from Ittai Kidron with Oppenheimer & Co.

Ittai Kidron -- Oppenheimer -- Analyst

Thanks and hi and congrats on a good quarter and nice to see growth in the guide. I had a couple things up. First of all for you, Kelly, can you update us on the number of Cisco ONE customers just for that housekeeping? And then for you, Chuck, getting a little bit deeper into the infrastructure part of the business, great quality on the product lines but maybe you can help us fine tune a couple of things. One, on the hyper-converged, I think, Kelly actually mentioned that you are off to a good start there but maybe you can help us understand where you stand on that product line, how good you feel about the platform, how stable it is.

And then the weakness in the enterprise routing, I'm just trying to [inaudible] how much of [inaudible] starting to make an impact there versus an execution or seasonal element. Is this going to be another part of your business that's just going to be under pressure for a long time as routing has been?

Kelly Kramer -- Chief Financial Officer

Yeah, I'll take that Cisco ONE. Cisco ONE continues to have a great momentum. We have over 22,000 customers at this point with that. So, a great momentum.

Chuck Robbins -- Chief Executive Officer

Ittai, thanks for your comments, by the way. On hyper-converged or HyperFlex offer, I would tell you that it has continued to probably be at the high end of my expectations. I'd say a couple of quarters ago it began to exceed what I was expecting. So, I changed my expectations but they're doing a great job.

The team's doing well. I think we know the use cases where it's very competitive and I think they continue to operate at the high end of what I expected from them. So, we're very pleased with that. On the question relative to SD-WAN and I think you nailed it right.

Our customers and we've talked about this for a couple of calls, our customers have been trying to assess what this SD-WAN architectural transition looks like and I think that after we acquired Viptela, we have now at our sales meeting provided tremendous clarity to our sales organization and our partner community at the partner summit about what our strategy is. We've now taken customers through the roadmaps of what they can expect and how to position the different alternatives that we have and how those portfolios are going to come together over the next 12 to 18 months. So, I think that it is a byproduct of the SD-WAN discussion and I would expect that we will start to see customers move somewhat this quarter and then in the second half of the year I think our customers will continue to begin to deploy some of these solutions. So, again, happy with where we are relative to the positioning of the different platforms.

Marilyn Mora -- Director, Head of Global Investor Relations

Next question, please.

Operator

Our next question is from George Notter with Jefferies.

George Notter -- Jefferies -- Analyst

Hi guys. Thanks very much. I guess I was curious about the revenue headwind associated with the move to subscription models including Cisco ONE. Can you remind us what you wound up [inaudible] in terms of the headwind in the October quarter and then also what are you seeing for January? Thanks a lot.

Kelly Kramer -- Chief Financial Officer

Hey, George, thanks for the question. Yeah, right now we're still seeing it around that 2% range. We expect the headwind to grow once we continue to grow that intuitive network that has the subscription. As that grows, that'll grow but right now it's in that 2% range, 1.5% to 2% range and we expect that to be roughly in that range next quarter as well.

Marilyn Mora -- Director, Head of Global Investor Relations

Mark, let's go ahead and [inaudible] the next question.

Operator

Our next question is from Tal Liani with a bank of America Securities/Merrill Lynch.

Tal Liani -- Bank of America / Merrill Lynch -- Analyst

Yes, my question is almost a follow-up to the previous question. I know you started at the beginning of the year to do the subscription on switching. Can you elaborate on, first of all, the experience you've had so far cases where customers took the subscription versus didn't take, what did it include? Just elaborate on the subscription and kind of the profile of it and also the take rate so far and whether you need to make any changes to it in order to improve take rate, etc. I'm just trying-to understand the implications for future years.

Thanks.

Chuck Robbins -- Chief Executive Officer

Yeah, Tal, thanks for the question. Let me break it down. So, the advanced subscription today is primarily being sold on the new Catalyst 9000 even though it's backwards compatible with two to three years' worth of products that we shipped in wireless and in routing, etc. but what the customers are doing right now is they're basically becoming accustomed to the platform, they're testing the platform before they make an investment on any sort of backwards compatibility is what I would tell you.

I don't think we need to make any changes right now because the attach rate of the most advanced subscription offer is at the very high end of what I would have expected. So, I think we're very pleased with where it is right now. And assuming we execute on the value and the innovation that our customers continue to gain from that, then I think will begin to see them then buy the subscriptions on some of their installed bases as well. That would be our intent.

Kelly Kramer -- Chief Financial Officer

And just to add to that and I guess to be clear, 100% of the switches come with a subscription. It's just a difference in what additional features and security added between advantage and the essential. 100% of the new switches are sold as a subscription and that's going well.

Marilyn Mora -- Director, Head of Global Investor Relations

All right, let's go ahead and key up the next question.

Operator

Our next question is from Mitchell Steve with RBC Capital Markets.

Mitchell Steve -- RBC Capital Markets -- Analyst

Hey guys, thanks for taking my question. I wanted to focus on security angle. So, despite having pretty difficult comparison [inaudible], can you maybe provide some color on what's going on there and secondly any sort of growth rates or rough numbers with the advanced [inaudible] web security growth rate?

Chuck Robbins -- Chief Executive Officer

Thanks, Mitch. So, I think that the thing that is resonating with the customer is if you're looking at the environments that they're all beginning to operate in, they're operating an environment where they have multiple SaaS providers, multiple cloud providers, they've got their private data centers with applications running, they've got their branch networks, they've got now edge connectivity with IoT coming in. And so, the robustness of an architecture that they have to have that protects across the network, across the endpoints, across the cloud is really what I think is differentiating. We've been on a multiyear journey of selling software and subscriptions against the threat intelligence and the malware intelligence that we have and I think that's what's continued to pay off.

So, I think it's resonating with our customers and it's an architecture that we can continue to innovate on, we can continue to expand on. Kelly, any comments on ...

Kelly Kramer -- Chief Financial Officer

Yeah. I mean, I'd just say advanced threat and unified threat as well as even web security, they're all up big double digits, I mean, just really strong growth.

Marilyn Mora -- Director, Head of Global Investor Relations

All right, thank you, Mitch. Mark, let's go ahead and take the next question.

Operator

Question is from James Faucette with Morgan Stanley Investment Research.

James Faucette -- Morgan Stanley -- Analyst

Thanks very much. I wanted to ask a question on capital structure. Can you give us an idea of what your preferences and priorities will be in capital structure in terms of buybacks and acquisitions, etc. if the proposed new tax changes pass versus if that change in tax law gets derailed? I'm particularly curious as to how you're thinking about the pacing of acquisitions versus buybacks, etc.

Thank you.

Kelly Kramer -- Chief Financial Officer

I'll take that one. What I'd say is in terms of acquisitions, the tax policy isn't impacting us either way because we are lucky to have a great cash flow and access to capital. So, it hasn't been stopping us from anything from an acquisition perspective and it won't. So, that will continue.

I would say we're definitely encouraged by the progress that's going on, on the tax reform. So, like we said in the past, when that happens and if we get a repatriation which both plans currently have, we're going to continue like we have, growing or dividend with our earnings growth and where we have opportunity is really to get much more aggressive than we have been on the share buyback and of course we want to make sure we continue to have enough firepower to continue to be able to do the right acquisitions to help position Cisco right for the long term.

Marilyn Mora -- Director, Head of Global Investor Relations

Okay, next question, please.

Operator

Our next question is from Simon Leopold with Raymond James and Associates.

Simon Leopold -- Raymond James -- Analyst

Thank you very much. I wanted to see if you could give us a little bit more insight into what you would attribute the outlook too in terms of this is Q1 with a year-over-year growth we've seen in quite some time. So, I'm wondering if we attribute it to an easy comparison or lapping the buildup of deferred revenue or some specific product cycles if you could help us assess the key elements bringing back year-over-year growth. Thank you.

Kelly Kramer -- Chief Financial Officer

I'll give you some color. I'd say the combination of things, right? I mean, if I go to the amount of revenue coming off the balance sheet from the progress we've been steadily making on growing our software and subscriptions, it's now up to 12% of our product revenue. It's now coming from recurring offers [inaudible] off the balance sheet. So, that's helping.

I would say also the launch that we had on the Intuitive Network and the excitement around the reinvention of the Core is having an impact. So, we're encouraged and you heard me mention, we were seeing positive demand on Campus switching overall which is great and that has a big impact because it's one of the biggest pieces of our portfolio. So, that combined with pretty good orders like we had in Q1 gives us a very good backlog position that allows us to have a good view into what the next quarter looks like. So, I'd say the overall strategy, what we've been executing and talking about for the last couple of years, we're making progress and all of this is benefiting us in the outlook.

Chuck Robbins -- Chief Executive Officer

James, just to clarify one point or just add to actually, when Kelly says 12% of our product revenue is coming from recurring offers, just to put that in perspective, when I became CEO, it was 6. So, we've effectively doubled that and I think that's certainly helpful and we're seeing positive feedback on the launch.

I'm sorry, that was Simon. I apologize, Simon.

Marilyn Mora -- Director, Head of Global Investor Relations

All right, thank you, Simon. Next question, please.

Operator

Our next question is from Jeffrey Kvaal with Nomura Securities International.

Marilyn Mora -- Director, Head of Global Investor Relations

Jeff?

Jeffrey Kvaal -- Nomura -- Analyst

Sorry, I'm on mute. Pardon me. Yes, I was hoping to ask about competition in the enterprise switching space and we've seen a little bit more out of Huwaei perhaps, not in the US of course but international. I'm wondering if you could put some of that color into context for us both from them and also from some of your traditional rivals.

Thank you.

Chuck Robbins -- Chief Executive Officer

Thanks for the question, Jeff. I think that if you look at some of the performance we saw around the world to your point, in Europe and Asia, we've talked about Huwaei's activity over the last couple of quarters, I would say that our teams have been very focused on it. I think that the Intuitive Network launch that we did in June really changes the discussion and where we compete with competitors, their value prop is upfront cost of the hardware, I think we're changing the discussion because if you look at the cost of operating this infrastructure over a five year period, it's probably 10X the cost of the upfront hardware. So, going and helping our customers really reduce that is a value proposition that helps us change the discussion relative to the competition.

So, it continued to be very tough but we think that competing on the price of the box up front is something that we can shift over the next couple of years.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Chuck. We'll go ahead and take the next question.

Operator

Our next question is from [Inaudible] with [Inaudible].

Unidentified Analyst Thank you and it's good to see security picking up. What are your expectations for security growth? In the past, you've talked about driving double-digit growth on the security side. Is that still a goal and where do you think you are in terms of getting there?

Chuck Robbins -- Chief Executive Officer

Yeah, Eric, thanks for that. So, at our financial analyst conference this summer we articulated a long-range guide in the line with what you just described. We're going to have quarters that are going to vary from that but that's definitely our long-term objective and I think our teams are focused now on what is it we need to do for the next wave of this architecture. Once we have this architecture built where we can actually defend and apply real-time defense against known threats and we can learn about a threat through a malware in an email and we can protect against it in the network and in the cloud and the devices at the endpoint all at same time.

So, teams are working hard to continue to drive innovation there but also looking at what other elements can we fit into this architecture over time and I think that's how we think about the long-term guide.

Unidentified Analyst Thank you.

Marilyn Mora -- Director, Head of Global Investor Relations

Next question, please.

Operator

Our last question comes through the line of James Suva Citigroup Global Markets.

James Suva -- Citigroup -- Analyst

Thanks, Chuck and Kelly. It's Jim Suva from Citi. On your guidance of up 1% to 3%, as you talked about earlier, it's the first time [inaudible] year-over-year revenue growth for quite a long time. Kelly and Chuck, you've mentioned strength in the orders and also the subscription model picking traction.

Are we now at a point where [inaudible] subscription is no longer dragging down year-over-year comps or is that still a bit of a challenge and the orders that Chuck mentioned are just so much stronger? And, Chuck, [inaudible] market areas we should think about for [inaudible]? Thank you so much.

Kelly Kramer -- Chief Financial Officer

I'll take the first part. I'd say no, we're still, I'd say, growing the base of the offers faster and putting it on the balance sheet that it's coming off but, again, both the year-over-year increase of the balance of 5.2 billion was up 37%. My income statement was of 37% [inaudible] but I'm still putting more and more offers and as we get scale through the core networking, not just on switching but the whole DNA center, I think that'll continue to add. So, it's still going to be a headwind and, as I said before, this 1.5 to 2 points will move to more like 2 to 3 points in the upcoming years as we get more scale there.

So, more to come but, again, we're starting to see the benefit of just having more stability and being able to have a better line of sight and less massive fluctuations by having that.

Chuck Robbins -- Chief Executive Officer

And, Jim, just a market segment perspective, it's probably pretty clear we saw service provider pretty much the same as it has been for some period of time. Our largest enterprise customers, which the way we define it, is an organizational segment that we have, we saw negative mid-single digits there which you saw on the slides. In our commercial business, we saw 12% growth on a global basis and it was double digits in every geography, which is always good to see. Our enterprise customers, what I would tell you, is that they're some of the biggest customers who take the longest amount of time to evaluate new platforms and new capabilities like the Network Intuitive as well as this whole SD-WAN discussion.

So, we're actively in those discussions with the enterprise customers. And our commercial customers tend to just move more quickly than others. And, finally, on the public sector side which we didn't talk about a lot, I think big call-out there, I would say, is that two quarters ago we talked about the pressure in the federal business. Last quarter we said we saw it improving and what I would tell you is that in this quarter we saw the yearend, it seemed fairly normal.

While they still have a lot of leadership roles that haven't been fiddled and we can still have the impending December debt ceiling issue, overall for this quarter we saw the federal business pretty much back to what we expected as we close the quarter. So, that's part of the commentary I would provide on the market segments.

Marilyn Mora -- Director, Head of Global Investor Relations

And I think we [inaudible]. Do you want to wrap up?

Chuck Robbins -- Chief Executive Officer

Okay, I'll wrap up. Thanks, everyone, again, for joining us today. I just want to wrap with a few points. First up, we're were committed to executing on this vision to deliver a highly secure intelligent platform for our customer's digital business and we're laser focused on five key elements of that strategy to enable our customer's success and drive profitable growth for us and shareholder value as well.

First, we're fundamentally reinventing networking with our intent-based networking platform. We intend to further accelerate our leadership here, extending intuitive technologies across the broad portfolio that we have while increasing application visibility and automation. Secondly, security is fundamental to everything we do. You can't build a next-generation digital business without a comprehensive security strategy across endpoints, network, and the cloud.

Third, it is very clear that it's a multi-cloud world and Cisco is in a unique position to help our customers navigate this by expanding our multi-cloud portfolio and extending our web-scale partnerships with strategic cloud providers. Our Google partnership is an example of the work we're doing with all of the large web scale providers. Fourth, we're unlocking the power of the data with advanced analytics such as our solutions with AppDynamics, encrypted traffic analytics, and Talos Threat Intelligence. We're also embedding AI and machine learning technologies across the breadth of our portfolio.

And lastly, we will continue to deliver a more enhanced customer and employee experience through our broad collaboration portfolio including our intent to acquire BroadSoft.

Marilyn, I'll turn it back over to you.

Marilyn Mora -- Director, Head of Global Investor Relations

Thanks, Chuck. Cisco's next quarterly earnings conference call which will reflect our fiscal 2018 Q2 results will be on Wednesday, February 14th, 2018 at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time.

Again, I'd like to remind the audience that in light of Regulation FD, Cisco's policy is not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. We now plan to close the call. If you have any further questions, please feel free to contact the Cisco Investor Relations Department and we thank you very much for joining the call today.

Operator

Thank you for participating in today's conference call. If you would like to listen to the call in its entirety, you may call 866-421-0447. For participants dialing from outside the US, please dial 203- 369, 0803. This concludes today's call.

You may disconnect at this time.

Duration: 46 minutes

Call Participants:

Marilyn Mora -- Director, Head of Global Investor Relations

Chuck Robbins -- Chief Executive Officer

Kelly Kramer -- Chief Financial Officer

Pierre Ferragu -- Sanford Bernstein -- Analyst

Mark Moskowitz -- Barclays -- Analyst

Steven Milunovich -- UBS -- Analyst

Vijay Bhagavath -- Deutsche Bank -- Analyst

Paul Silverstein -- Cowen & Co. -- Analyst

Ittai Kidron -- Oppenheimer -- Analyst

George Notter -- Jefferies -- Analyst

Tal Liani -- Bank of America / Merrill Lynch -- Analyst

Mitchell Steve -- RBC Capital Markets -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Simon Leopold -- Raymond James -- Analyst

Jeffrey Kvaal -- Nomura -- Analyst

James Suva -- Citigroup -- Analyst

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